THE JUDICIAL REVIEW OF CONTRACTUAL DECISION MAKING: IMPLICATIONS OF BRAGANZA FOR PROPERTY LAWYERS. Landmark Chambers

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1 THE JUDICIAL REVIEW OF CONTRACTUAL DECISION MAKING: IMPLICATIONS OF BRAGANZA FOR PROPERTY LAWYERS Tom Weekes QC Landmark Chambers November Over the past couple of decades, an important issue has bubbled away in the case law without attracting, amongst practitioners or academics, the attention that it deserves. 2. The question is how a Court should approach a challenge to the exercise, under a contract, of a discretionary power. In property law, discretionary powers are common. The type of discretionary power that we, perhaps, most often encounter is the power of a contracting party (or, perhaps, someone else) to grant a consent: leases and restrictive covenants frequently confer on someone a discretionary power to grant or withhold consent for such things as changes of use, building or alterations. But, as property lawyers, we encounter many other types of discretionary power. For example, under a Jervis v Harris clause a landlord, during the term of a lease, has a discretion to enter the demised premises and carry out works to remedy disrepair. 3. Sometimes, a discretionary power is subject to an express fetter or constraint. For example, section 19 of the Landlord and Tenant Act 1927 provides that a landlord s ability to consent to assignments is subject to an implied proviso that consent is not to be unreasonably withheld. But suppose the discretionary power contains no express fetter? If there is no express fetter on the exercise of a discretionary 1

2 power, the question is: on what grounds, if any, can a Court review, or overturn, the exercise of the power? In other words, what constraints or fetters on the exercise of the power will the Court imply into the contract? 4. In March 2015, there was an important decision of the Supreme Court about that question. Namely, Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR That decision has attracted little comment (certainly from property lawyers). But this is a case that merits our attention. Authorities before Braganza 5. Before turning to Braganza itself, it is helpful to look at how some previous authorities approached this type of issue. It turns out, that there was no consistent or coherent approach. And the concepts adopted by the Courts when they grappled with the issue were often somewhat vague and difficult to pin down. 6. This can be illustrated by three property cases which illustrate the contrasting approaches adopted by the Courts to discretionary powers. 7. First, in Viscount Tredegar v Harwood [1929] AC 72 a 99 year lease of a house provided: The lessee shall and will...insure...the [house] in the Law Fire Office or in some other responsible insurance office to be approved by the lessor.... The tenant insured the house, not at the Law Fire Office, but with the Atlas Company. The landlord refused to grant its approval for insuring with that company. The tenant argued that the landlord was not entitled unreasonably to withhold its consent to a responsible insurance office, and that, in the circumstances, the landlord s refusal to approve insurance with the Atlas Company was unreasonable. The House of Lords rejected that submission. Lord Shaw said (at page 79): In the present case no such restriction or condition upon the right of approval 2

3 or disapproval by the landlord is imposed. The case is the simple one of one sound office being named, with the alternative given of another responsible office approved by the lessor. If the lessee will not insure in the Law Fire Office nor in any other responsible office which the lessor has approved, the covenant is broken...i am of opinion..that this condition precedent cannot be removed or hold as satisfied, because in the opinion of a court of law the lessor s refusal was unreasonable. 8. Secondly, in Paragon Finance plc v Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685, a mortgagee sought possession of a house relying on mortgage arrears. The mortgagor disputed the amount of the arrears. The mortgage provided that the rate of interest may...be increased or decreased by the company at any time.... The mortgagee had raised the interest rate. The mortgagor claimed that the increases had been unreasonable, and, therefore, ineffective. The Court of Appeal held that mortgagee s entitlement to vary the interest rate was subject to implied constraints. Dyson LJ said (at page 699 to 700, and page 702): In the absence of an implied term, there would be nothing to prevent the claimant corm raising the rate demanded of the [mortgagor] to exorbitant levels, or raising the rate to a level higher than that required of other similar borrowers for some improper purpose or capricious reason. An example of an improper purpose would be where the lender decided that the borrower was a nuisance (but had not been in breach of the terms of the agreement) and, wishing to get rid of him, raised the rate of interest to a level that it know he could not afford to pay. An example of a capricious reason would be where the lender decided to raise the rate of interest because its manager did not like the colour of the borrowers hair. 3

4 [There is therefore] an implied term that the discretion to vary interest rates should not be exercised dishonestly, for an improper purpose, capriciously or arbitrarily... [Also, there was an] implied term to include unreasonableness that is analogous to Wednesbury unreasonableness...[namely] a term that the lender will not exercise his discretion in a way that no reasonable lender, acting reasonably, would do. 9. Finally, in Lymington Maria Ltd v Macnamara [2007] EWCA Civ 151, [2007] 2 All ER (comm) 825 a 99 year licence to use a mooring at a marina provided that the licensee was permitted to grant a sublicence. The licence agreement provided that the licensee could authorise a third party to exercise all the rights hereby granted...for a period of not less than one month and not more than twelve months PROVIDED ALWAYS that such third party shall first be approved by the Company. One of the licensees had no immediate use of his mooring. So he applied to the company for permission to grant a sublicence. The company refused to grant consent. The trial judge (Patten J) held that there was an implied term that the company could not unreasonably withhold consent; and, as in the Paragon Finance case, he held that this reasonableness test was analogous to the public law test of Wednesbury unreasonableness. The Court of Appeal disagreed. Arden LJ said (at paragraphs 37 and 44):...the judge was in error in using public law principles in this context... [However] there has to be implied a term that the power to withhold approval should be exercised in good faith and that the approval will not be withheld arbitrarily...it is obvious that if that if the licence hold is to obtain the proper benefit of [the right to grant sub licences the company] should not be in a position to withhold its approval in bad faith or capriciously. 4

5 10. Accordingly, as these three cases illustrate, the authorities prior to Braganza exhibit a lack of consistency in the Courts approach to the exercise of discretionary powers. There was a lack of consistency about whether contractual discretionary power were subject to any implied constraints, and, if they were, the Courts could not agree on whether the constraints were essentially the same as those that enabled a Court, in a public law context, to review decisions of public bodies. Also, the Courts resorted to a series of concepts (e.g. good faith, dishonesty, arbitrariness, capriciousness), which were rather imprecise and uncertain. 11. In short, the guidance hitherto provided by the Courts on the approach to contractual discretionary powers has been piecemeal and somewhat rudimentary. BRAGANZA 12. Mr Braganza was the chief engineer on a BP oil tanker called the MV British Unity. Between 1am and 7am on the night of 11 May 2009, whilst the tanker was in the mid-north Atlantic, Mr Braganza disappeared overboard. Clause of Mr Braganza s contract of employment provided that...compensation for death...shall not be payable if, in the opinion of the company..., the death...resulted from...the officer s wilful act. So, to ascertain whether it was required to pay compensation to Mr Braganza s widow, BP had to work out whether Mr Braganza had committed suicide. BP set up an inquiry. The inquiry sat for four months. It concluded that Mr Braganza had committed suicide by throwing himself overboard, with the result that BP did not have to pay compensation to Mr Braganza s widow. 13. Mr Braganza s widow issued proceedings challenging that finding 14. The case reached the Supreme Court. Their Lordships considered the principles falling to be applied when one party to a contract is given a 5

6 power to exercise a discretion, or to form an opinion about relevant facts, that is capable of affecting the other party to the contract. Baroness Hale said (at paragraph 19): There is an obvious parallel between cases where a contract assigns a decision-making function to one of the parties and cases where a statute (or the royal prerogative) assigns a decisionmaking function to a public authority. It is right, therefore, that the standard of review generally adopted by the courts should be no more demanding than the standard of review adopted in the judicial review of administrative action. The question is whether it should be any less demanding. The decided cases reveal an understandable reluctance to adopt the fully developed rigour of the principles of judicial review of administrative action in a contractual context. But at the same time they have struggled to articulate precisely what the differences might be. 15. The Supreme Court reached the striking and important conclusion that there is little or no difference between the approach of the Court when reviewing the exercise of a contractual discretion to the approach of the Court when reviewing the exercise by a public authority of a statutory discretion. Baroness Hale said (at paragraph 28) that: There are signs...that the contractual implied term is drawing closer and closer to the principles applicable in judicial review. Lord Neuberger said (at paragraph 103) that when a contract allocates only to one party a power to make decisions which may have effect on both parties:...there is considerable force in the notion that [the approach to be taken to a contractual discretion] is, and at any rate should be, the same as the approach which domestic courts adopt to a decision of the executive.... 6

7 16. That meant that BP s inquiry was required to satisfy both limbs of the test propounded by Lord Greene MR in Wednesbury test. First, BP s finding that Mr Braganza had committed suicide was required, when viewed objectively, to be one that a reasonable fact-finder could have reached. Secondly, BP s reasoning, when viewed subjectively by reference to the mental processes of the inquiry, was required to have had regard to all relevant matters, and to have disregarded all irrelevant matters. In other words, the implied obligations included, not only the outcome of the inquiry, but also how the inquiry s decision was arrived at. 17. Applying that approach, the Supreme Court held that Mr Baganza s widow succeeded. Their Lords held (by a three/two majority) that the inquiry s conclusion was flawed because it had failed to have regard to a relevant matter. Namely, the inquiry had it had failed to apply a legal principle: the principle being that suicide was such an inherently unlikely thing to happen that a finding of suicide can properly be made only if there is cogent evidence supporting a finding of suicide. BP should also have had in mind that it was all the more unlikely that Mr Braganza would have committed suicide because he was a Roman Catholic, and so, for him, suicide was a mortal sin. CONCLUSION 18. I make the following points in conclusion. 19. Whilst Braganza is an important decision, we shouldn t get carried away. In Patural v DB Services (UK) Ltd [2015] EWHC 3659 (QB), Singh J said that Braganza was...an interesting example of the continuing development of the common law and in particular of the potential for cross-fertilisation between concepts of public law and private law...however, for my part, I would respectfully sound a note of caution. It is to be recalled that the fundamental basis of public law is that public authorities have only those powers which 7

8 are conferred upon them by law and must act in the public interest. Private actors such as employers and business entities more generally do not necessarily have the same duties. 20. In particular, there are some types of contractual power or discretion to which the principles set out in Braganza have no application. Often, a contracting party, when deciding whether to exercise a power or discretion, will be entitled to have regard solely to his own selfinterest. This will be the case, for example, when a contracting party deciding whether to terminate a contract (e.g. exercise under a break clause) or to exercise an option. In Monk v Largo Foods Ltd [2016] EWHC 1837 (Comm), David Foxton QC (sitting as a deputy judge) said (at paragraph 60): I would respectfully doubt the general applicability of the principles developed in the contractual discretion cases to terminate at law or under a contract. 21. Nevertheless, Braganza is likely to embolden the Court in reviewing the exercise of contractual discretions. The Courts will be more likely to find that contractual discretions are subject to implied fetters. And the approach of the Courts is likely now to be less piecemeal and woolly. Having recognised that the approach to contractual discretions is broadly similar to the approach to the review of the exercise of statutory discretions by public bodies, the Courts will now be able to draw upon the reasoning from a fully developed set of legal principles. The law will be more coherent and clear. 22. For a one line summary of the impact of Braganza, here is what Sir Kim Lewison said in The Interpretation of Contracts (2015, 6 th edition): As a result of this decision the exercise of a contractual discretion will be easier to challenge. 8